DEFINITION: A Forward Exchange Contract or FEC:
is an agreement to exchange currency at a future date based on a price agreed today.
You can protect your business from sudden shifts in the exchange rate by securing the rate upfront. Forward contracts are generally used to secure and hold the rate while the market is favourable or to protect future payments against POTENTIAL exchange rate erosion.
A forward contract is a risk aversion tool, by locking into the rate upfront, you can rest assured that the value of your future payment won’t change.This is particularly useful in the case of the ZAR where the price can move by as much as 70 cents in a day.
Benefits of forward contracts:
- They can be used by both importers & exporters.
- Peace of mind. By guaranteeing the rate you can protect profits.
- Eliminates risk and exchange rate exposure.
- The business can budget & forecast more accurately.
- The business can manage & optimise cash flows better.
- Settlement dates can be fixed or flexible.
Important to note:
- By locking into the rate, you accept that this is the price you will get regardless of what the market does in the future.
- Forward contract rates are calculated based on a combination of interest rate differentials and time. Depending on the currency pair being traded – the rate you get may be at a discount or premium to the current spot rate. (our dealers can talk you through the pricing of FEC’s)
- If your circumstances change and you no longer require all or part of the funds, anything not utilised, will be sold back to the market at the prevailing rate, which may result in a financial loss.
- The bank will require a deposit of 10% of the transactional value to secure and hold the rate.